Strategy for bear market retirees

The stock market is oblivious of your retirement timing and hence, you should be ready for any eventuality. For the first time, after the great financial crisis of 2008-09, we are witnessing such a sharp cut in the equity market. While volatility is the part and parcel of the equity market, individuals near retirement may wonder how an increase in market volatility can impact their second innings.

When it comes to spending one’s nest egg in retirement, the sequence of returns plays a vital role. If most of your retirement corpus is invested in the equity market, any major decline within the first five years of your retirement can significantly impact the chance of the portfolio lasting for a longer period.

In these circumstances, retirees are hit with a double whammy: Their portfolio value declines as withdrawing money to spend in retirement only forces you to realise those portfolio losses. Therefore, retirees should always follow these steps to protect themselves from the adverse impact of any sharp downturn in the equity market. The assumption is that the frontline equity market recovers in three years and for this purpose, you need to apply a bucket strategy as mentioned below:

1. You should put money worth a year requirement, in a money market fund. Although these funds give a minimum return, the volatility is least.

2. For the next two years’ worth, your money requirement should be invested in short-duration bond funds. Depending upon the interest rate scenario, they will give you a respectable return, which is not impacted by the falling market.

3. Rest all your retirement funds, should be put into a well-diversified stock and bond portfolio, with a proper balance between cyclical and defensive sector.

4. At the beginning of the year, you should replenish your money market fund by replacing that outlay with money from your short-term bond fund. This will give you a steady income for three years.

If you follow the above steps, it will help you to provide an income for three years, no matter what happens in the market. This also restricts you to realise your losses in the equity market. If the market is up, you can simply replenish your bond fund annually with money from your portfolio. This approach also gives your portfolio, a quality time to recover.